Warning for wealth managers: declining fees

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Declining fees may be a growing concern for financial advisers.

Fees as a percentage of assets fell for the first time in four years, even though average assets under management per adviser soared to a record $92 million last year, according to new research by PriceMetrix, a Toronto-based research, consulting and software firm.

Revenue per adviser also slumped 1.4% in 2016 to $583,000.

“Even advisers who have lowered prices aren’t necessarily gathering new business any more effectively than those keeping prices steady,” says Patrick Kennedy, chief customer officer at PriceMetrix, which was acquired last year by McKinsey & Company.

Fee rates for households in the North American wealth management market for households with investable assets of $1 million to $5 million dropped to 1.13% from 1.16%.

Fees on new accounts fared even worse. After slipping gradually since 2013, new-account fees sunk to 1.07% of assets last year.

One solution may be a transition to fee-based subscription models, Kennedy says. According to PriceMetrix data, two thirds of clients are still using transaction-based fee models meaning there is still a lot of room for wealth management firms to make the switch.
“Fee-based is the preferred method of working for most financial adviser,” according to Kennedy. “But, assets still remain in transaction models and that is something that we have to watch very closely.”

One of the leading contributors to the decline in revenue is a lack of customers, according to the report, "The State of Retail Wealth Management."

Advisers added only 7.5 new household relationships on average in 2016, a new low, after years of decline.

Advisers have preferred to focus on older, higher-net-worth clientele, Kennedy says.

“Many advisers over the past five or ten years have been deliberately working with fewer clients and focusing on more affluent clients,” he explained. “It’s a concerning evolution, but not necessarily a bad sign.”

Spending more time with fewer clients can actually be a positive for some, he said, since advisers have more time to spend with customers, leading to higher levels of client retention and faster growth.
Focusing on affluent clients, however, may alienate younger ones. With the advent of robo advisers, which offers online accounts for a fraction of the price of traditional advisers, newer and younger clients are simply staying away.

“Robo advisers are certainly a force in play,” Kennedy says. Newer generations haven’t had the means or the ability to begin new relationships with advisers.

Despite last year's revenue slump, Kennedy believes there may be a potential light at the end of the tunnel. Instead of focusing on high-net worth clients that promise easy revenue and high commission, Kennedy believes the most successful firms have focused on adding younger clients.

“Growing new clients and assets – clients that are more likely to work on a fee basis – and maintaining price levels has helped grow revenue,” he says.
The top quartile of advisers added 8.7 new client relationships last year and averaged 26% revenue growth year-over-year, according to the data, contrasted with the bottom quartile that added only 5.6 new clients, and a 17% average drop in revenue.

“The bible strategy was to focus on high-net-worth, but history is starting to show that, in addition, advisers need to start managing demographics and replenishing their clientele,” Kennedy says.
The sixth annual State of Retail Wealth Management study, released Wednesday, collected data from 60,000 financial advisers from 24 North American firms and more than $5 trillion in assets held.

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RIAs Fee-based compensation Practice management PriceMetrix